TREATMENT OF LOSS ON CONSIGNMENT
In consignment, the goods are to be sent from one place to the other. There is always a possibility of some kind of loss of stock. The consignor has to bear the loss, not the consignee. The Treatment of loss on consignment is for two types of losses:
- NORMAL LOSS
- ABNORMAL LOSS
ACCOUNTING FOR NORMAL LOSS
Normal loss is the loss that occurs due to the nature of the goods consigned. Its nature is as follows:
- It occurs due to unavoidable reasons.
- It is due to natural causes such as losses due to evaporation, normal leakage, spoilage, breakdown, drying etc.
- It forms the part of cost of goods sold.
- It is taken into account only when unsold stock is to be valued.
- It is not shown in the consignment account.
- No entry is passed in the books regarding the normal loss.
CALCULATION
Value of unsold stock= {Total cost of goods consigned/ (Total Quantity sent-quantity of normal loss)}*Unsold Quantity
EXAMPLE: Suppose 200 tons of coal is consigned @ Rs. 20 per ton, expenses being Rs. 400. If loss due to loading and unloading is 10 tons and if the quantity sold by the consignee is 152 tons, then the value of stock unsold (38 tons) will be as follows:
| Cost of 200 tons of coal | 4,000 |
| ADD: Expenses | 400 |
| Total cost of 200 tons | 4,400 |
The cost of 200 tons becomes the cost of 190 tons because of a normal loss of 10 tons.
Hence the cost of 190 tons= Rs. 4,400
Value of 38 tons of stock= (4,400/190)*38= Rs. 880
ACCOUNTING FOR ABNORMAL LOSS
Abnormal Loss may arise due to mishap, mischief and inefficiency. This loss is not natural and can be avoided with proper care. Its nature is as follows:
- It is unnatural and avoidable.
- It arises due to reasons like fire, riot, flood, theft, road accident etc.
- In case of abnormal loss, the value of stock is not inflated.
- It is calculated after taking into consideration the proportionate expenses incurred on it.
JOURNAL ENTRIES
WHEN GOODS ARE INSURED
| When abnormal loss is incurred Abnormal loss account Dr. To consignment account |
| When insurance company admits the claim Insurance claim account Dr. Profit and Loss Account Dr. To Abnormal Loss Account. |
| Receipt of Insurance Claim Bank A/c Dr. To Insurance company A/c or Insurance Claim A/c |
WHEN GOODS ARE NOT INSURED
| When abnormal loss is incurred Abnormal loss account Dr. To consignment account |
| Transfer of abnormal loss Profit and loss account Dr. To abnormal loss account |
CALCULATION OF ABNORMAL LOSS
STATEMENT SHOWING CALCULATION OF ABNORMAL LOSS DURING TRANSIT
| PARTICULARS | AMOUNT |
| Cost price of goods lost in transit | |
| ADD: Consignor’s proportionate expenses (Consignor’s total expenses/ total units sent)*units lost | |
| Cost of abnormal loss during transit (A+B) |
STATEMENT SHOWING CALCULATION OF ABNORMAL LOSS IN CONSIGNEE’S GODOWN
| PARTICULARS | AMOUNT |
| Cost price of goods lost in consignee’s godown | |
| ADD: Consignor’s proportionate expenses (Consignor’s total expenses/ total units sent)* Units lost. | |
| ADD: Consignee’s proportionate non-recurring expenses (Consignor’s total non-recurring expenses/ Total units received by consignee)*Units lost | |
| Cost of Abnormal loss in consignee’s godown (A+B+C) |
STOCK VALUATION IN CASE OF LOSS
Value of the remaining stock is composed of the following:
- Proportion of the cost of goods.
- Expenses incurred on goods before the occurrence of loss.
- Expenses incurred on goods after the loss has occurred.
(Closing Stock/ Total Cost)*(Cost of goods+ expenses before loss)
EXAMPLE: X consigned 100 cycles costing Rs. 150 each to his agent Y. Expenses incurred in sending them were Rs. 1,000. On the way 5 cycles were damaged. Y took the delivery of the rest and incurred direct expenses of Rs. 285 and indirect expenses of Rs. 150. Calculate the amount of abnormal loss.
| Cost Price of 5 damaged cycles @ Rs. 150 each | 750 |
| ADD: Proportionate expenses of X (1,000/100)*5 | 50 |
| 800 |